The Way to Preservation and Prosperity in an Insecure World

My comments: Hubert Moolman shows a very compelling fractal analysis of the technical charts on Silver, and believes that according to the fractal patterns forming (triangle formation forming a base under a flag type formation) currently for Silver, it is poised for a massive spike. Check out his article here: http://www.silverseek.com/article/massive-spike-price-silver-imminent

Previously, I posted a blog about whether Gold & Silver are in a Bubble. In my opinion, watching the symptoms, as well as the causes behind bubbles, I do not see Gold & Silver in the Bubble phase yet. However, I do see a possibility of Gold & Silver entering a bubble phase in about 5 years.

I said that I was bullish on Gold & Silver. What I mean is that Gold & Silver are in a Bull Market, and are poised to make serious gains even before it enters the dangerous bubble phase. So, what exactly does a Bull Market mean?

In economics, a Bull Market is a phase of an asset with steadily rising prices which are gaining momentum. This phase is marked by a step-like chart in the price of the asset, where the asset goes higher and higher in price.

So, what drives a Bull Market? Here are the forces that drive a Bull Market forward.

1. Supply constraints: temporary or extended supply reduction in supply due to disasters or weather conditions causing reduction in production or artificially imposed sanctions such as government decree, withdrawal of funding, geo-political tensions, worker strikes, etc, or economic conditions such as management cutting production to reduce costs and/or increase profits.

2. Demand boost: temporary or extended increase in demand due to economic conditions causing more people to buy the asset, or artificially imposed incentives or conditions such as government subsidies, grant of funding, government orders to buy large quantities, etc.

3. Liquidity & credit: large amounts of funding available for buying assets. This is always an artificial condition which is caused by the government printing more money, or creating easy credit by lowering interest rates, etc.

4. Transfer of funds from one asset class to another: when one asset class becomes unpopular, the funds will move from that asset class to a more popular asset class, causing the unpopular asset class to fall in price and the popular asset class to rise in price.

5. Mass psychology: markets are always driven by people’s psychologies, whether it is a bull market, a bear market, or a bubble. The bubble is part of a bull market’s phase, namely, the 3rd phase, also known as the Mania phase. In any phase of a bull or bear market, there are 2 emotions that propel people to either buy or sell; fear, and greed. People may buy an asset out of Fear, or out of Greed, and people may also sell an asset out of Fear or Greed. Example; some people fear that the economy is doing poorly, so they buy Gold (fear). On the other hand, some people may buy Gold because they think Gold will go higher and give them a big profit (greed). On the other hand, some people may sell Gold because they think Gold has become too high in price, and that they should sell it (fear), or some people may think Gold has become high enough and it was time to take some profits and sell (greed). Now, this is admittedly a simplistic view, but it explains the psychology of why people do what they do in a nutshell. An even more general idea is that people buy an asset when they expect it to go higher (greed) and they sell it when they think it will go lower (fear).

The 3 Stages of a Gold Bull Market – This shows the 3 stages of a bull market.

So, to look at the Gold prices, we can see all the 5 elements of a bull market.

1. Supply constraints: Gold production is not increasing. In fact, despite the rise in gold prices, the cost of producing gold is also rapidly increasing. So, Gold producing mines that cannot profitably mine gold has to be either shut down, or put on hold until they become profitable. Cost increases include increase in worker wages, environmental clean up costs, cost of energy (increase in oil prices), cost of royalties paid to land owners, cost of equipment, cost of insurance, cost of taxes, cost of legal protection, and cost of capital required to start a mine.

2. Demand boost: Gold demand has been increasing rapidly. This demand boost comes from several factors such as increasing demand from the growing middle class in India and China, as well as from central banks around the world, mostly from BRIC countries (Brazil, Russia, India, and China), where the central banks in Russia, India, and China are rapidly increasing their gold reserves. Another factor is the global financial crisis coming from the danger of debt defaults in European countries (Portugal, Italy, Ireland, Greece, and Spain), as well as in the United States, which are causing many financially savvy investors to buy larger quantities of gold to protect their wealth against economic collapse.

3. Liquidity & Credit: The central banks from around the world are keeping the borrowing rates very low to buoy the debt crisis and to encourage the banks to lend money and inject liquidity into the market as well as cause businesses to start spending again. This easy credit atmosphere is exactly what is needed to propel the Gold Bull market forward. Since the global economy isn’t getting better anytime soon, it is safe to assume that the easy credit will continue for at least a few more years (not a few more months). This easy credit atmosphere puts inflationary pressure on essential assets such as food, energy, and basic materials, as well as precious metals.

4. Transfer of funds from one asset to another: Due to the low interest rates, it is causing bonds, money market accounts, CDs, and savings accounts to yield next to nothing. This will cause yield -seeking investors and retirees (America has 75 million baby-boomers, who are beginning to reach their retirement age) to seek higher-yielding investments, and Gold, even though it does not pay dividends, does tend to produce very high capital gains in easy credit environments. In fact, an average annual yield of 15% is common for Gold in this environment.

5. Mass psychology: the many factors, including all of the above plus the fear factor of war in the middle east, especially the increasing war rhetoric between the US, Israel, and Iran, will cause a ‘fear trade’ into Gold (massive gold buying caused by fear), causing gold to skyrocket in a very short time from current prices. When the prices go higher quickly in Gold, this will also trigger a ‘greed trade’ which will drive prices even higher (profit seekers buying gold with hopes for higher profits). These many factors are here to stay, causing gold to cause wild swings in prices, rapid rises followed by quick profit-taking, followed by fear-induced selling, leading to rapid declines. This is a natural phenomenon of the Bull Market, and the Gold Bull Market is no different.

As the experienced traders say, “the bull will try to buck you off, but you need to hold on tight to win this rodeo”. Be warned: The Gold Bull Market is not for the faint of heart, or the weak of constitution. If you make too many mistakes, or big mistakes, you will fall off and get trampled, or worse, gored by the Bull.

As a last note, the ‘Bubble’ phase is the 3rd phase of the Bull Market, also known as the ‘Speculative Mania’ phase. This is the most dangerous phase where people will throw caution to the wind and bet their farm on the market, and literally lose their farm and even the shirt on their backs. Getting caught on the wrong side of the trade, or being the “Greater fool” at this phase will possibly permanently take you out of the game very quickly if you “Bet your farm” in this later phase.

So, what’s the best way to win this rodeo? Knowledge of your bull, knowledge of yourself, knowledge of the market, knowledge of what is driving the prices higher, mastering the trading game, knowing who not to listen to, and who to listen to, getting in before the market gets crowded, and getting out when the market gets too crowded, will help you win this rodeo.

Have fun riding the bull, and be safe!

P.S. Don’t listen to the media or the so called ‘experts’ or ‘gurus’ who say the Gold bull market is over, or dead… they’ve been wrong before, and they’re going to be wrong again, and again..

So, I am writing this today because I get this misunderstanding from a lot of people that I talk to regarding the price of Gold & Silver being too high, and in a sense, that most people think that it will not stay this high, and that it is in a “Bubble”. Now, one thing that I notice is that most of these people, whether they are successful investors or not, were not able to predict the real estate market crash, which I have warned them since 2006. And understandably, most of these people that I have spoken to have been more than a little shaken by the fact that the real estate market, which ‘the experts’ have said would always be going higher, have crashed and taken away their ‘paper wealth’. And I understand their reluctance to buy Gold & Silver without much enthusiasm. So, let me try to explain, for that is all I can do, try to explain, with the hopes that you will understand better why I am so Bullish on Gold & Silver.

So, let me begin by explaining what a bubble is. A bubble, or an economic bubble in layman’s terms is when an asset that can be traded is trading in unusually high volumes with prices that are extremely beyond the true intrinsic value of the asset. One of the biggest observable symptom of a bubble is called the “mania”, or “irrational exuberance” as Greenspan called it which makes the masses willing to pay an asset exceptionally high prices. There are very clear examples in hind-sight, and they can be a very telling sign – just recently, we had a Housing Bubble, and the tell-tale sign was that most of the people were willing to pay exorbitant prices for homes that were worth half, or a quarter, or a fifth of what they were willing to pay.

So, let me list the symptoms of a true economic bubble, so that you can determine for yourself if Gold & Silver are in a bubble or not. The first two has to do with economics, and the rest have to do with psychology.

1. Liquidity. Before a bubble could form, there needs to be funds available to pay for the asset that people want to buy. Whenever there is a bubble, there is always without fail easily accessible funds, or easy credit, or easy loans available to fund the purchase. Without this, bubbles cannot form, period. These funds may come from people with deep pockets, from lenders, or from the sale of another asset.

2. Incentives. Usually, whenever there are incentives to buy a certain asset, people will flock to that asset. For example, this can be in the form of government tax breaks, bailouts, and other concessions that make the true price of the asset lower in the economic sense, and thus makes it more profitable to buy the asset.

3. The Greater Fool theory. When an asset begins to move higher in price, there has to be people on the other side to be willing to pay an even higher price for that asset to continue going higher in price. Thus, the existence of someone willing to pay an even higher price is considered ‘the greater fool’. Without this ‘greater fool’, the bubble cannot perpetuate.

4. Optimism, or Positive expectations. When enough people see that the price of an asset continuing to go higher, many people will begin to think that it will continue to go higher perpetually to infinity, or for a long time. Therefore, many people will think that ‘now is a good time to buy’. Without the optimism, or positive expectations, for the future price of the asset, most people will not buy the asset with the expectation for a profit.

5. Herd mentality. This is possibly the most dangerous and irrational part of the mass psychology. As more and more people get into the market buying the ‘popular’ asset that they see ‘everyone is buying’, they will begin to think that this is the right thing to do, because ‘everyone is doing it’. For most people, they get in when most people they know have bought the asset in question, and they feel “safety in numbers”.

Unfortunately, as more and more people crowd into the asset, there is less and less funding available and there are less and less people to buy into it, and thus fewer ‘greater fools’ to keep the bubble going. This is the usually near the last stage of the bubble, and the bubble usually begins losing the liquidity, the greater fools, and the market begins to turn south. As the market begins to turn south, the optimism fades, and the early smart buyers begin to cash out, and with the cash out accelerating, the herd panics, and the crash begins. The people who gets hurt the most are mostly people who enter the market too late.

So, to apply the bubble symptoms to the Gold & Silver market, I would like to ask you a few questions, so that you can decide for yourself if there is a bubble in the Gold & Silver market.

1. Is more funding made available for Gold & Silver buyers? Or are more funds available to buy Gold & Silver? Are there anyone advertising loans made specially for Gold & Silver?

2. Are there any incentives such as government tax breaks or concessions as in housing tax deductions?

3. Do you know anyone who is trying to buy your gold and silver from you for higher prices than you paid, if you have any?

4. Do you see or hear from your neighbors, friends, family, and co-workers, and the taxi-driver, the shoe-shine boy, and the department store clerk about buying Gold & Silver?

5. Do you see or hear about long lines of people at Gold & Silver coin shops or jewelry stores trying to buy Gold & Silver?

6. Do you see or hear from the mass media companies enthusiastically promoting buying Gold & Silver from the news anchors and talk show hosts who gush excitedly about how much Gold & Silver they bought lately?

Now, if your answer is a resounding YES for any one of the questions, then you know that Gold & Silver are getting into a bubble stage. However, if you find yourself answering a clear YES to more than one, or all 6 of the questions, then you need to sell most of your Gold & Silver holdings immediately, because the crash of the bubble is at hand.

Have you ever wondered why you find gold attractive? If you are like most people, you would.

But there is more to gold than its physical attractiveness. It is considered a Noble metal, and it is only used to create objects that are considered noble.

Take a look at the funeral mask of pharaohs, and the death mask of the Mycenean king Agamemnon, as well as the Aztecs. These artifacts were made for leaders in the days who were considered to be either gods or legends in their own days.

The Aztecs considered Gold as a product of gods, or literally excrement of gods. And gold was plentiful in mesoamerica, and the legend of El Dorado, the City of Gold was born.

And of course, in South East Asia, countries like Burma and Thailand applied gold to stupas, pagodas, and buddha statues. So, what is the connection? Gold is a symbol of purity, royalty, and value, as well as excellence. Gold is rare, precious, stable, survives the test of time, and resistant to corruption by chemical means. These qualities of gold makes it an excellent symbol for lofty spiritual ideals and mysticism, making it a prime candidate for artifacts made for lofty purposes.

First of all, I don’t want you to be scared, but I do want you to be prepared. Being prepared in this case means you have a plan and you have the resources and protection you need to weather this economic storm. This is going to be just a short summary of what you need to survive an Economic Collapse that is coming. Now, a word of warning: if you believe that the government will save you, and protect you from the Economic Collapse, do not read further, since I believe that the government CANNOT and WILL NOT save you, since the real priority for the government will be to save itself, and the status quo. Not only that, most of the economic problems that we face today are the result of government mismanagement and bad policies that had gone on for far too long. The only thing you can do is to be prepared of this eventuality and save yourself.

Robert Kiyosaki, the author of Rich Dad, Poor Dad, and dozens other Rich Dad series books, have predicted in no uncertain terms in his book Rich Dad’s Prophecy that a giant stock market crash aka economic collapse will happen around 2015-16. He also suggests the 4 G’s of survival: gold, guns, grub, and gas. Gold & Silver have survived and thrived over many thousands of years as currency, and they seem to perform well under tough economic conditions such as recessions and depressions, caused by either inflation or deflation. Guns, or firearms will allow you to protect yourself and your home when society breaks down, and police are non-existent or over-stretched to protect your home from looters and robbers and vandals. Grub, or food and water will allow you to survive through the tough economic times when the food is scarce or extremely high priced, or difficult to get due to supply chain disruptions caused by a breakdown of society. Gas, or access to gasoline and other fuels and other energy sources will allow you to have a means of getting around in your vehicle or heat and light up your home when fuel is scarce or difficult to get to while society breaks down around you.

To be realistic, the chances of an Economic Collapse is very high. If you look around you, there are signs everywhere – those that you can see and those that you will need to research to see and understand.

Early Signs of Economic Collapse:

High unemployment rate

Struggling businesses, closing stores, bankruptcies, layoffs, etc.

Retail stores have to aggressively promote to make sales

More people on unemployment lines, food stamps, etc.

High foreclosure rate

Rising food & energy prices

Rising medical care costs

Rising education costs

Rising civil discontent – see Occupy Wall Street

Low morale and hopes of people – ask around how optimistic people are these days

Unseen, or need to dig a little deeper to see:

High inflation rate (high rate of money-printing all around the world)

In case you have been wondering why the oil prices have risen above $100/barrel (WTI crude), and over $123/barrel Brent Crude, there is a very simple explanation. And that is the devaluation of the US Dollar. The Fed has been printing money (i.e., monetizing debt) and lending easy money at near zero rates (0.25%), that it is inevitable that the value of the US Dollar will suffer. On the surface, the US Dollar may seem to be doing well when compared to the other currencies such as the Euro, but this is only a temporary and illusory situation. There is a saying “In the land of the blind, the one-eyed man is king.”. It just happens that the US Dollar situation is only slightly less worse off than the Euro.

So, how does that affect Oil prices? Simple. When the dollar is devalued (worth less), the seller will ask for more dollars to sell the same amount of goods. This is the law of supply and demand – there is a glut of dollars floating in a sea of liquidity, that there are more dollars chasing the same amount of oil. The same is true for the price of gold being much higher ($1500 – $1700) than a few years ago, say back in 2010 ($1100 – $1400). It is not that the value of gold going higher, it is because the value of the US Dollar is going lower.

Of course, there are other factors that compound to the prices of oil and gold going higher, such as the supply being relatively constant, while the demand being higher, most of the demand coming from the rapidly growing giant Asian economies such as China and India. China and India are consuming vast amounts of oil, at a rate that is rapidly catching up on US oil consumption. China and India also have a tremendous appetite for gold, in fact, greater than the demand from Europe and the North America combined.

Then, there is another factor which causes oil and gold prices to go higher: geopolitical tensions, and specifically in the Persian gulf, where the 40% of the World’s oil flows through the Straight of Hormuz. Due to the political tensions between Iran, Israel, and the US, if a war breaks out between these nations, the Straight of Hormuz will be no longer safe for the oil tankers to flow through, and therefore, the price of oil will rise as a result.